After suffering a huge 45% fall earlier this week, shares in digital payments company, EML Payments Ltd (ASX: EML) made a brief 15% recovery at one point yesterday, before finishing the day just shy of 4% higher from their previous close.
With EML’s valuation at such a large discount from where it was previously, it may be standing out to some as a potential value play. On the other hand, with the short-term outlook still unknown, more negative news can certainly not be ruled out at this stage.
EML share price
Recap of recent events
If you haven’t heard by now, one of EML’s subsidiaries – PFS Card Services (Ireland) Limited (PCSIL) was notified by the Central Bank of Ireland (CBI) recently about a potential breach of anti-money laundering and counter-terrorism regulations.
EML’s Irish subsidiary is estimated to contribute around 27% of the company’s total revenue. At this stage, EML’s other operations in Australia, the US and England have not been affected.
While EML’s market valuation nearly halving in just one day may seem like an overreaction, this investigation may now give other regulators in other regions a reason to put a magnifying glass over its operations, which could potentially reveal some unwanted skeletons in the closet.
It was noted that PCSIL aims to provide the CBI with submissions relating to the issues by 27 May.
EML also reiterated FY21 guidance, which, I thought was a little strange and almost irrelevant considering it excluded all potential costs and impacts from the matter.
Time to buy EML’s shares?
EML’s shares are likely to remain in a state of limbo until further information is provided, which will provide a clearer picture of the future of its European operations.
As a worst-case scenario, EML could be up for a huge loss of revenue if certain operations were forced to cease. On the other hand, it might get away with a warning or be fined and it could likely be business as usual.
The difficulty here is that under these two vastly different outcomes, the intrinsic value of EML’s shares today would also likely be significantly different.
Therefore without more information, I’d be betting on a largely unknown outcome, which just isn’t my style of investing. This is why I won’t be buying shares at the moment.
For some more share ideas, click here to read: These 3 beaten up ASX growth shares are looking good: XRO, RBL and KGN.
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